Sunday, December 25, 2011

Predictably Irrational: Chapter 6

Dan Ariely is a behavioural economist who refutes the idea that we are fundamentally rational. Through empirical data, experiments and anecdotes, he illustrates that our irrationality can actually be predicted. He then presents ways in which we can make more rational decisions, both as investors and as people.

Another way in which we behave irrationally has to do with our penchant for procrastination. Our desires of the moment overcome our long-term goals, resulting in emotional decisions that make us poorer, and not just financially. Examples of this include how we don't save enough for the future and how we can't resist the dessert tray even when it hurts our health.

Through a series of experiments, Ariely demonstrates that advance planning can help us overcome this weakness. Pre-commitments can help enormously. For example, if we schedule a cholesterol test (a test which has many cancellations) by first committing to a $100 deposit which we only get back if we don't cancel, many of us can minimize this tendency to cancel. People who are forced or given the flexibility to schedule their time also tend to procrastinate less.

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